Judgment

BHAGWATI, J.:- The short question that arises for determination in this appeal is whether certain commission paid by the assessee to its employees is an allowable expenditure in computing the profits of the assessee from business. The assessee is a registered firm which at all material times consisted of five partners, namely, Chaman Lal, Madan Lal, Harbans Lal, Raj Mohan and Saheb Dayal representing a trust. Chaman Lal was the son of Saheb Dayal and Raj Mohan was the son of one Gurditta Mal. During the accounting year relevant to the assessment year 1963-64, Chaman Lal and Harbans Lal had their own independent factories and hence they were not attending to the business of the assessee and Raj Mohan too was not actively associated with the conduct of the business of the assessee as he was working with the Oriental Carpet Manufacturers India Pvt. Ltd. (hereinafter referred to as OCM). Thus, from amongst the partners, only Madan Lal was looking after the day-to-day management of the business of the assessee and he was assisted by Saheb Dayal and Gurditta Mal who were engaged as employees of the assessee. Saheb Dayal and Gurditta Mal were looking after the business of the assessee since a long time and they were each paid remuneration of Rs. 1000 per month. The business of the assessee consisted of sole selling agency of OCM in respect of yarn, cloth and blankets manufactured by OCM and for the sales effected by the assessee as such sole selling agents, commission was paid to the assesse by OCM. The figures show that the business of the assessee prospered from year to year from 1950-60 onwards and there was a gradual increas in the turnover of the assessee which jumped from the figure of Rs. 39.99 lacs for the assessment year 1962-63 to the figure of Rs. 54.28 lacs for the assessment year 1963-64. Since the assessee showed very satisfactory turnover from year to year, OCM started giving to the assessee, in addition to the usual commission, overriding commission at the rate of 2 1/2% on the sales effected by the assessee and the overriding commission thus received by the assessee during the previous years corresponding to the assessment year 1960-61 to 1963-64 was as follows:

Assessment year Amount Received

1960-61 Rs. 35,964/-

1961-62 Rs. 61,818/-

1962-63 Rs. 83,922/-

1963-64 Rs. 1,13,449/-

Since the turnover of the sales reached the figure of Rs. 54.28 lacs and overriding commission increased to Rs. 1,13,449. during the previous year corresponding to the assessment year 1963-64, the assessee decided to give to each of Saheb Dayal and Gurditta Mal, who were looking after the business and were primarily responsible for the increased prosperity of the assessee, commission at the rate of 1/2% of the sales out to 2 1/2% overriding commission received from OCM and each of these two employees was accordingly paid by the assessee a sum of Rs. 22,690 by way of commission. The aggregate amount of commission paid to Saheb Dayal and Gurditta Mal thus came to Rs. 45,360 and this amount of commission was claimed by the assessee as a deductible expenditure in its assessment to income-tax for the assessment year 1963-64. The Income-tax Officer disallowed the claim of the assessee on the ground that there was no material produced by the assessee which would prove the nature of services rendered by these two gentlemen in lieu of which the commission is claimed to have been paid and there being no evidence to show that the increase in sales during the relevant accounting year was due to the efforts of Saheb Dayal and Gurditta Mal, the claim for deduction of the amount of commission as a business expenditure remained unproved. The assessee appealed against the disallowance of the amount of commission but the Appellate Assistant Commissioner in appeal affirmed the disallowance on the ground that no evidence had been produced by the assessee to prove that the activities of Saheb Dayal and Gurditta Mal in the relevant account year were of a na